January 31, 2007

Fish, Power Plants, and Cost-Benefit Analysis

Lisa Heinzerling

In a huge victory for fish and other fans of the Clean Water Act, the Second Circuit last week ruled that the Environmental Protection Agency may not use cost-benefit analysis in setting standards for cooling water structures used at existing power plants around the country.

These structures draw in huge amounts of water from water bodies adjacent to the power plants they cool. Fish are killed when they are either trapped at the inlet to these structures or drawn into the machinery of the structures themselves. The number of fish killed is almost unbelievable. A single power plant might kill billions -- yes, billions -- of fish in a single year.

The Clean Water Act instructs EPA to set standards for these cooling water intake structures. In its first pass at the issue, EPA decided to require state-of-the-art technology for the largest and most damaging facilities. By the time the agency's proposal had passed through the regulatory review process required by the White House, however, this requirement was gone. In addition, a new "compliance alternative" had emerged: plants could avoid installing even the less effective technology required by the amended proposal if they showed that installing that technology failed a cost-benefit test. In simple terms, this meant that if the cost of the equipment exceeded the value of the fish that would be killed if the equipment weren't installed, the plant could avoid installing the equipment. (And the White House didn't see much value in these fish.) Thus the White House -- through its regulatory office, the Office of Information and Regulatory Affairs (OIRA) -- succeeded in both weakening the substance of EPA's proposal and in substantially altering the meaning of the relevant provisions of the Clean Water Act, by interpreting them to allow standard-setting based on cost-benefit analysis.

The Second Circuit didn't buy it. The court ruled that the Clean Water Act does not permit the use of cost-benefit analysis in setting these standards or in allowing deviations from the standards. Quite reasonably, the court held that the agency could engage in a form of cost-effectiveness analysis in setting standards, by identifying the level of protection afforded by state-of-the-art technology and then allowing use of cheaper but equally effective technologies in meeting the standards. But the court clearly ruled out OIRA's favorite technique for undoing regulatory advances, cost-benefit analysis.

The court declined to decide an issue briefed to them (by amicus OMB Watch, represented pro bono by me), regarding OIRA's role in the regulatory process. We had argued that EPA's interpretation of the Clean Water Act deserved no deference under Chevron because it was, in reality, OIRA's, not EPA's interpretation. The court did not need to reach this issue because it held that cost-benefit analysis was just not permitted under the Act.

OIRA's role in this rulemaking proceeding also led to another interesting, also unresolved, legal skirmish. In arguing that OIRA had foisted its own interpretation on the agency actually charged with implementing the statute in question, we relied on publicly available documents showing exactly how OIRA's intervention had led to alterations in EPA's proposal. Out of all of the 6,000 records in the agency's docket on this rule and the hundreds of pages of typical legal mumbojumbo trying to explain the agency's decision, the documents showing the results of OIRA's intervention furnished the only really clear explanation of why EPA did what it did. Yet EPA moved to exclude these documents from the agency record -- despite the fact that they had been made public by the EPA itself and despite the fact that EPA itself had originally placed them in the docket. EPA explained that they were "deliberative" documents that shouldn't play a role in the court's review of EPA's rule. Here again, the court found no need to rule on this issue because it disposed of the case without looking at OIRA's role in the process. However, EPA's position that public documents showing exactly why it chose the rule it did does not bode well for meaningful judicial review in future cases.